Tim Colebatch is The Age's economic editor.

There is something to be said for conventional wisdom. Since it is widely shared, a government can win support for sensible action by appealing to it. We can't live beyond our means. Australia has to be a country that makes things. Markets, not governments, should decide what the dollar is worth.

Conventional wisdom can build fiscal self-discipline. It is important that budgets are in balance over the cycle. It is desirable that services are financed by tax revenues, and that, in normal times, governments borrow only to invest in new infrastructure.

But conventional wisdom can work against us in unconventional times. Its rules can become like blinkers on a horse, preventing us seeing that we are in new terrain where the old axioms no longer work. We mistake policy principles that worked in the past for eternal truths, and refuse to think seriously about new ways to solve new problems.

If there's one thing life has taught me, it is that human behaviour has few eternal truths. Some rules work in some situations but fail in others. Ministers, officials, managers and ordinary folk like us need diverse tool kits from which we can pick the best solution for each problem.

Advertisement

Yet in public debate, the need for flexibility is scorned. When J.K.Galbraith introduced the concept of conventional wisdom in The Affluent Society, he noted that politicians in particular had little choice but to follow it: ''People like to hear articulated that which they approve''. To follow a new course is politically risky. To follow a conventional course, even if it's wrong, ensures you are seen as a sound thinker.

Conventional ideas often fail to match it with new challenges. We have seen that here, as the markets have pushed up the value of our dollar to post-float highs, making overseas trips incredibly cheap, but Australian-made goods and services incredibly expensive in global markets.

In many countries, central banks intervene or governments change laws to hold their currencies down, and ensure that producers remain competitive. But in Australia, it is conventional wisdom that the Reserve Bank and the governments must let the dollar float freely (apart from occasional raids to stop it falling too low). The only action Reserve governor Glenn Stevens has taken in this crisis has been to argue that the dollar is overvalued. And governments, Labor or Liberal, have done nothing.

This is orthodox policy, in unorthodox times. It has made Australian producers uncompetitive. It is forcing jobs overseas. Whether it's Qantas shutting its airport maintenance base at Avalon, Simplot downsizing its food processing plants, or Holden weighing up an exit that would bring most of our car industry down with it, these are all casualties of the high dollar - casualties we can't afford.

The high dollar cannot last forever. But there is a limit to how long companies can go on losing money while waiting for the dollar to fall. We are allowing a temporary over-valuation to shut down economic capacity permanently. This is not how the successful Asian economies operate.

The car industry is the most important battlefront. It has been hammered since the dollar began climbing, and consumer tastes switched from Holdens and Falcons to imported SUVs. Since 2005, the local manufacturers' share of Australian vehicle sales has shrunk from 25 per cent to just 10 per cent.

Even so, in 2013 the Commodore is still Australia's third-biggest selling car, with the Camry/Aurion sixth and the Cruze seventh. The industry still employs 42,000 workers and produces $4 billion a year of net output. But it's not making money, and the overvalued dollar makes it unprofitable to export.

Industry Minister Ian Macfarlane is working flat out to try to persuade the manufacturers to stay, but his leader radiates indifference. The Coalition's policy is to withdraw $500 million of promised funding from the industry, a clear breach of faith, and to ask the Productivity Commission to advise on future aid - after the South Australian election. That all implies that Tony Abbott and Joe Hockey have decided to let the industry fold.

It is a huge price to pay for our failure to bring down the dollar. The Allen Consulting Group estimates that in Melbourne, closure of the industry would cost 33,000 jobs; nationally, the economy would be set back by $7.3 billion a year. It would certainly set the budget back, with lost taxes alone exceeding the $400 million a year we pay in industry assistance.

It makes far more sense to bring the dollar down. Stevens has tried to talk it down, in vain. Even interest rate cuts are doing more to inflate house prices than to deflate the dollar. It's time to try new policies.

First, the Reserve should intervene in the market - either by pushing back against the currency traders as they push the dollar up, or by setting a ceiling for the exchange rate, as the Swiss do, and selling dollars to keep it down.

The Reserve has only limited ability to push the dollar up; that requires foreign exchange. But it is much simpler to push the dollar down; it just requires lots of Australian dollars, which the Reserve can create at will.

The government should remove the $2 billion a year tax break Wayne Swan gave to foreign buyers of Australian bonds in 2009 when he thought we needed incentives to attract them. There are other options, but that would benefit the budget and the economy.

Tim Colebatch is economics editor of The Age.

43 comments

Australia has really painted itself into a corner. Time for China to bail us out to protect their North Shore property investments.

Commenter

mj

Date and time

November 12, 2013, 7:36AM

Finally someone is talking about this. Every other developed nation that matters has got near zero interest rates and the US and UK is suppressing long-term yields through QE. The right policy, I believe, given the circumstance. But it creates serious difficulties for everyone else.

Many developing countries have implemented capital controls on short-term flows to prevent the inflow of capital that is fleeing this zero interest rate environment, to limit their currency appreciation and the size of the shock when capital flow reverse. Meanwhile, good old conservative Australia does nothing but stick to the conventional wisdom that has been reassessed everywhere else in the world. Now we have talk of free trade agreements with China!!!

I would not recommend quantitative easing. I would recommend the reserve bank targeting an exchange rate of, say 75-85 cents, explicitly stating this will only remain until the zero rate environment in Europe and the US is over. If necessary, the RBA should sell Australia currency and put the foreign currency reserves in the Future Fund. If this comes at the cost of some inflation, while the currency ratchets down, so be it. (Please don't quote the quantity theory of money back at me here).

The other risk is an asset boom, here and overseas. To offset the low interest rates here and overseas, the government should be implementing tougher lending requirements (e.g. deposit and collateral rules on residential loans) to prevent low domestic interest rates and capital inflows inflating Australian asset prices further. Another unconventional policy, yes, but we need to survive the current period of turbulence without sacrificing long-term financial stability. The risk for Australia of having come through the GFC relatively unscathed is that we are setting ourselves up for a bigger crunch down the road.

Commenter

Andrew

Location

Fitzroy

Date and time

November 12, 2013, 9:49AM

They seem to have us pitched somewhere between Norway and Saudi Arabia. The populace is expected to take up mediocre service jobs while the loot is controlled by a small minority. Lower interest rates would lower the dollar and benefit construction so why aren't they lower. Employment stats are cooked and have been since Howard fudged them during GST implementation. Any property boom can be managed ie with FHOG's for new home buyers only, in certain zones only (such as Darwin). Take borrowing for property out of superannuation, there are all sorts of existing measures which could be modified, simplified, limited or removed.

Commenter

bg

Date and time

November 12, 2013, 10:33AM

What rot, to say that our dollar needs to be lower to support foreign companies is an insult to all Australians. Why should the value of my investments be halved to pacify uncompetitive operations. When the dollar was so low a few years ago there was no push to raise the dollar to bring value back for ordinary Australians.

With a liberal government I would of thought they would be doing evevrything in their power to make ordinary Australians richer not just the top 1% of wealthy supporters.

Commenter

Captain Mick

Date and time

November 12, 2013, 7:42AM

Mick, the value of your investments will only be halved if you spend the money on products outside Australia. The value of a dollar you spend on Australian goods and services will be the same, even if the dollar falls. If you're really worried about this, invest some of your money in foreign shares, which is pretty simple with most super funds or investment products. Then, if the dollar falls, you gain.

Commenter

Axminster

Location

New York

Date and time

November 12, 2013, 8:46AM

You can insult us more by buying an imported car!

Commenter

Kingstondude

Location

Melbourne

Date and time

November 12, 2013, 8:58AM

Such selfish and short sighted thinking, most investments would go up in $A if the dollar was devalued .That is unless you have invested in Australian bonds or have had cash sitting around. However the dollar going down would cause inflation which would also cause those investments to go up in $A value. The real problem is any policy that would devalue the dollar would most likely send the property boom spiralling into the stratosphere.

Commenter

trigga

Date and time

November 12, 2013, 10:08AM

Mick - you have no idea how things really work. I work for a small Australian company trying very hard to sell product to an international market place. We are everything that a "great Aussie success story" should look like. But our cost base is ridiculously, absurdly expensive and the #1 reason for this is the high dollar. An A$ drop of 20% would have a greater impact on our profitability and desire to expand and employ more people than any other single factor I could think as a remote possibility of happening.

Commenter

Tom

Location

Melbourne

Date and time

November 12, 2013, 12:28PM

"With a liberal government I would of thought they would be doing evevrything in their power to make ordinary Australians richer not just the top 1% of wealthy supporters."

You don't know much about how Liberal governments work, do you?

Commenter

Jace

Date and time

November 12, 2013, 1:56PM

"With a liberal government I would of thought they would be doing evevrything in their power to make ordinary Australians richer not just the top 1% of wealthy supporters."

Sorry Captain. I think that inversion of reality means you are officially busted to private.